Abbott Laboratories (ABT) has continuously been moving up in a nice stepping pattern for the last year. As we get closer to its spin-off, new information on the company's drug Humira should continue to make the stock increase in value. Let's look at two major factors I believe should keep the stock bullish for the foreseeable future.
Money-maker Humira has just become even more valuable for Abbott. Last year, it brought in $8 billion for Abbott and is the company's biggest seller and one of the biggest in the world. When the company splits, the pharma business AbbVie will look even more enticing with the growth of Humira.
The anti-inflammatory drug has been used for rheumatoid arthritis and Crohn's Disease, but now it will also be used for ulcerative colitis. The FDA voted 14-2 in favor of the move. This opens up an estimated $1 billion in additional revenue for the drug. Even though the approval has come, Abbott still needs to identify the proper dosage that will be used.
One of the benefits of the drug is that it can be self-injected, while alternatives like Johnson and Johnson's Remicade must be given by IV. The final approval is supposed to be toward the end of September - which could make the spin-off AbbVie all the more attractive.
The Spin-off Factor
Long-term retrospective studies have shown spin-off companies outperform the market and their peers before and significantly after, in their first three years after the spin off. Many studies have found that spin-offs and parents do outperform the market - with the edge going to spin-offs.
One of the more commonly cited studies by Patrick Cusatis, James Miles and J. Randall Woolridge was published in a 1993 issue of The Journal of Financial Economics. It determined that spin-offs and parents surpassed the S&P 500 Index by an average of 30% and 18%, respectively, during the first three years of trading in spinoff shares. Management teams at the spin-offs have greater incentive to produce. Shares in spin-offs and parents both appear to be worth holding.
Thus, the two factors - the possible FDA approval and the spin-off of AbbVie - will keep the stock bullish. This offers us a good opportunity for a short-term income strategy while the stock grows.
July and August capped off an ascending triangular pattern that is often identified as a bullish continuation pattern. As expected, the stock broke out of the pattern the first week of September and has been on a tear ever since.
The share price spiked on Thursday and I would not expect it to remain at the same clip, but I do expect it to continue to keep going up because of the spin-off coming and also because of the potential new $1 billion income stream from Humira and ulcerative colitis. It is a little over bought right now, but I expect it to continue up after a move sideways. I would look for a bullish income play at this point buying the first option in the money.
The Options Play
Presently the stock is trading at 68.25.
- Buy a November 2012 call with a strike price of '67.50' (priced at $1.84)
- Sell a November 2012 call with a strike price of '70.00' (priced at $0.69)
- Net Debit to Start: $1.15
- Maximum Profit: $1.35
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Trade
- Before the split, I expect value to continue to go up.
- Humira will elevate the value of pharma section AbbVie.